Error in Asset Derecognition Overstates Profit by Carrying Value

Steps:

• Calculate correct profit impact: loss of $3000 ($8000 carrying value minus $5000 proceeds).
• Identify mistaken entry: debits bank $5000 and credits sales$5000, increasing profit by $5000.
• Note omission: asset not removed from books, so $3000 loss not recorded (further inflating profit by$3000).
• Determine total overstatement: $5000 (extra revenue) +$3000 (unrecorded loss) = $8000.

Why D is correct:

• Per IFRS 16 (or equivalent), derecognizing a non-current asset requires removing its carrying value from the balance sheet; failure to do so, combined with erroneous revenue recognition, overstates profit by the full $8000 carrying amount.

Why the others are wrong:

• A: $1500 ignores the combined effects of extra revenue and unrecorded loss.
• B: $5000 captures only the erroneous sales credit, omitting the unrecorded$3000 loss.
• C: $6500 has no basis in the transaction's profit impacts.

Final answer: D